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For Wang Tai Holdings Limited’s (SEHK:1400) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not every stock is exposed to the same level of market risk, and the market as a whole represents a beta of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
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What does 1400’s beta value mean?
With a five-year beta of 0.52, Wang Tai Holdings appears to be a less volatile company compared to the rest of the market. This means that the change in 1400’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. 1400’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
Could 1400’s size and industry cause it to be more volatile?
A market capitalisation of HK$170.50M puts 1400 in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, 1400 also operates in the luxury industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the luxury industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by 1400’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can 1400’s asset-composition point to a higher beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test 1400’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, 1400 appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of 1400 indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts 1400’s current beta value which indicates a below-average volatility.